Updated from 9:29 a.m. EDT
The turnaround implemented by
late CEO, Jim Cantalupo, looks more entrenched than ever after the fast-food chain's first-quarter earnings report, analysts said Wednesday.
"McDonald's is not letting their foot off the gas," said Carl Sibilski, an analyst at Morningstar. "In the past, competitors could nip at the business by offering a product or service.
McDonald's is now in a different stage. If competitors get up off their feet it's because McDonald's let their foot off their throat."
Tuesday after the bell, the fast-food giant reported that first-quarter profit jumped 56% from a year ago as Cantalupo's campaign to wring profitability out of existing restaurants and back off breakneck growth continued paying big dividends.
McDonald's earned $511.5 million, or 40 cents a share, in the latest quarter, compared with earnings of $327.4 million, or 26 cents a share, last year. Revenue jumped 16% to $4.40 billion from $3.80 billion, with $288 million of the gain coming from favorable currency translation attributable to the weakened dollar.
Analysts surveyed by Thomson First Call had been forecasting earnings of 40 cents a share in the latest quarter. The shares were up 56 cents, or 2.1%, to $27.76.
True to the blueprint of Cantalupo, McDonald's reported solid gains in the profitability of its restaurants, with the profit margin rising 160 basis points at company-operated outlets to 14.3% in the latest quarter over last year. In the U.S., the profit margin at company-owned restaurants jumped 370 basis points to 18.2%.
The company has emphasized promoting customer loyalty and improving its menu since Cantalupo -- who
died April 19 of a heart attack -- took the reins in January 2002. Since that time the stock has rocketed skyward, outperforming the broader market by a factor of more than 2 and more than doubling since March 2003.
"We served 2.3 million more customers during the first quarter compared with the same period in the prior year -- the equivalent of adding roughly 1,500 restaurants, yet we added only 100 restaurants over the past 12 months," McDonald's said in a Tuesday press release.
On a subsequent conference call Wednesday morning, the company emphasized that it plans to maintain Cantalupo's revitalization plans. Sibilski said new CEO Charlie Bell and new Vice Chairman Jim Skinner, "really laid down the law and said 'We're still on the same track' as far as the consumer and capital allocation go."
Sibilski noted that keeping McDonald's turnaround strong should be natural for Bell because he helped Cantalupo engineer the turnaround.
The rest of the management team is also fully on board, said Doug Christopher, an analyst at Crowell, Weedon. "No one whose there currently would still be there if they weren't in touch and in line with Cantalupo's vision or strategy," he said.
Regarding the quarter's results, Christopher cited the company's improvements in operating margins and its increase in return on sales and return on assets. "Historically the fist quarter is a dead quarter for retail anyway, and
McDonald's is showing strong results," said the analyst, who is personally long shares of McDonald's stock. (Crowell, Weedon & Co. does not do investment banking.)
McDonald's said its systemwide sales, which are sales at owned and franchised outlets, jumped 17% in the first quarter form a year ago, or 10% on a constant-currency basis. Comparable restaurant sales increased 9.4% in the quarter.
McDonald's also alluded to a dividend increase possibly in the third or fourth quarter, said Christopher. Its last dividend of 40 cents a share was paid on Dec. 1.
The company may still have work ahead in its European operations. Sibilski thinks that because the introduction of salads in the U.S. and Australia has been successful thus far, a full rebound in Europe might not be far off. Salads were rolled out to two regions in Europe in April and will be introduced to 16 more this summer.
"Europe will start in their turnaround in the next quarter," Sibilski predicted. McDonald's has about 30,000 restaurants in 119 countries. (Morningstar does not do investment banking and Sibilski does not hold shares of McDonald's.)
Shares of the company were also upgraded Wednesday by U.S. Bancorp Piper Jaffray to outperform from market perform. The brokerage said it is confident that the company's new CEO will stay focused on efficient uses of capital and "revive its dormant European juggernaut." (Piper Jaffray does investment banking for McDonald's.)
Looking ahead, expanding its business in China could be another key area for McDonald's, according to Sibilski. "China is on the verge of exploding," he said. Although the company already has restaurants there, the analyst suspects it could take a few years to build up critical mass for them to add significant profit to the company.